Royal Ahold NV - The US Foodservice Accounting Fraud
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Case Details:
Case Code : FINC044
Case Length : 18 Pages
Period : 2000-06
Pub Date : 2007
Teaching Note : Available
Organization : Royal Ahold NV, US Foodservice
Industry : Retailing
Countries : US/Netherlands
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Please note:
This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.
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Excerpts
Accounting Fraud at US Foodservice
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Before the acquisition of USF in April 2000, Ahold was mainly involved in retail
activities in the US. After Ahold decided to acquire USF at US$ 26 per share in
February 2000, two teams were sent to the USF to conduct due diligence.
The
first team carried out financial due diligence and found that in a report dated
August 1999 by KPMG, the auditors of USF, it was stated that promotional
allowances had not been accounted properly. The report mentioned that there
could be an error in reporting income and recommended that USF should adopt a
more formal system to account for promotional allowances...
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Events Leading to the Disclosure
In the last quarter of 2002, USF started ordering large quantities of
products from its suppliers in its efforts to meet its revenue targets. The
company had realized that it would not be able to meet the annual target of
over 15% growth over 2001 sales. USF booked the rebates it was supposed to
receive from the suppliers immediately but did not make payments to them for
the products ordered. In order to meet the targets, in October 2002, top
executives in USF asked all its regional managers to order large quantities
of food supplies and other products from the manufacturers...
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The Investigation
Immediately after the accounting irregularities in USF were reported by
Deloitte, on February 12, 2003, the company authorized an investigation by
law firm White & Case LLP and by forensic accounting advisors from Protiviti
Inc.
In March 2003, Morvillo, Abramovitz, Grand, Iason and Silberberg PC (Morvillo)
and PricewaterhouseCoopers (PWC) conducted additional investigations of the
accounts of USF. SEC also conducted a probe on the accounting irregularities
at Ahold. In the investigation conducted by SEC, it was found that since
1998, USF had been overstating operating income by recording higher
promotional allowances. |
According to SEC, "USF artificially inflated its operating
income by recording promotional allowances that were not earned in the period
recorded, and in many cases were entirely fictitious." SEC instigated public
administrative proceedings against two of the auditors of KPMG, who had audited
and reviewed financial statements of USF in the year 1999 and for the first two
quarters of the year 2000...
Excerpts Contd...>>
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